Just the Medicine: 49% Profit Growth

By

Johanna Bennett

April 9, 2013

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A new blood thinner and a few other experimental medications could generate thick wads of cash for Medicines Co.

With company-wide sales of roughly $560 million last year,
Medicines Co.
(ticker: MDCO) is a small drug maker specializing in medications used in hospitals. High hopes surround a new blood thinner, cangrelor. Impressive clinical trial results were released earlier this year, raising confidence that the drug will pass muster at the Food and Drug Administration next year, driving earnings – and Medicines Co.'s stock price – higher.

At a Glance

Medicines Co. (MDCO)

Stock Price:

$31.75

52-Week High:

$34.03

52-Week Low:

$19.37

Market Value:

$1.7 billion

Est. 2013 EPS:

$0.93

Fwd P/E:

34

Est. Long-Term EPS Growth:*

49%

Est. (2013/2012) EPS Growth:

None

Revenue (trailing 12 months):

$559 million

Dividend Yield:

None

CEO:

Dr. Clive Meanwell

Headquarters:

Parsippany, N.J.

*Based on analyst estimates looking ahead three to five years. Sources: Thomson Reuters and Yahoo! Finance

Yet cangrelor is just one of four drugs that could receive FDA approval in 2014. And even if only two of them reach the U.S. market, it's enough to fuel ferocious top- and bottom-line growth and lift shares another 25% to roughly $40 over the next 12 months.

Medicines Co.'s attractive pipeline is no secret. At their closing price of $31.75 Tuesday, the shares were up 32% since the start of the year, far outpacing gains by the broader market. And at 34 times 2013 earnings estimates, Medicines Co. hardly looks cheap. But as RBC Capital Markets analyst Adnan Butt puts it, "it is hard enough to find a company with one drug that can get approved. This one has four."

Founded in 1996, New Jersey-based Medicines Co. markets a handful of drugs to hospitals, a niche market not known for big blockbusters. Nearly all of its sales stem from Angiomax, which is used by interventional cardiologists to prevent blood clots in patients undergoing procedures to remove blockages from coronary blood vessels. By 2019 Angiomax will start losing sales to generic rivals, so Medicines Co.'s future is hitched to new products.

The company has been adept at using acquisitions and licensing deals to build a pipeline. Its small size can be an asset. Drugs too small to move the lever at giants such as
Amgen
(AMGN) or
Pfizer
(PFE) can dramatically improve sales and earnings.

Acquired from
AstraZeneca
(AZN) in 2003, cangrelor has attracted the most attention on Wall Street. It is intended to prevent heart-attack-causing blood clots that can develop during procedures to implant stents. In clinical trial data released earlier this year, it outperformed the widely used clopidogrel – a generic name for Plavix.

But cangrelor has other benefits. Clopidogrel is slow-acting, can't be readily absorbed by some patients, and lasts in the body for up to a week, which is a drawback if a patient needs emergency surgery.

Cangrelor, however, acts fast and dissipates when administration is stopped, qualities that should attract doctors.

Analysts expect Medicines Co. to file an FDA application for cangrelor by June. And with FDA approval expected by mid-2014, RBC's Butt sees sales reaching $400 million in five years.

The experimental antibiotic, oritavancin, has similar potential, thanks in part to the dwindling number of antibiotics that treat hard-to-kill bacteria. In study data released in December, the drug worked as effectively as an older antibiotic in treating skin infections, including those caused by a hard-to-treat staph infection commonly called MRSA.

But perhaps its biggest appeal: Oritavancin is given in one dose over several hours while other treatments are delivered over several days, requiring patients to stay in the hospital.

Data from a second large clinical trial are expected midyear. The company should have an application to the FDA before the end of 2013, with agency approval coming 12 months later.

Sales, meanwhile, could reach $300 million in the next five years, according to RBC's Butt.

Analysts are less sure about sales estimates for Ionsys, a painkiller for postoperative patients, and MDCO-157, an IV-version of Plavix, creating the potential for upside surprises. FDA approvals are expected for both drugs next year.

Based on estimates that include little contribution from Ionsys and MDCO-157, Wall Street sees Medicines Co. earning $1.48 a share in 2014, up from 93 cents a share this year. Over the next three to five years, earnings per share could grow an average of 50% or more annually, according to Butt's estimates.

Granted, investors must be willing to pay up for that profit growth. Butt's $40 price target is roughly 24 times the $1.66 he sees Medicines Co. earning next year. And given's the stock's run so far this year, investors won't be forgiving of delays or setbacks getting new drugs approved.

Still, as Guggenheim's Chen puts it, "There is more to this story. Investors have started to realize that this company is on a sustainable growth trajectory."

Full Disclosure

• Guggenheim Securities and/or one of its affiliates intends to seek compensation for investment-banking services from Medicines Co. in the next three months. The firm has a Buy rating on the stock.

• RBC Capital Markets has an Outperform rating on Medicines Co.

•Credit Suisse and/or one of its affiliates intends to seek compensation for investment-banking services from Medicines Co. in the next three months. The firm has an Outperform rating on the stock.

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